1. Field of the Invention
The present invention relates to financial services and more particularly to automated trade execution and recordkeeping services for a fund of hedge funds.
2. Description of Related Art
Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different funds. These Funds of Funds (FoFs) are designed to achieve greater diversification than single manager funds. Investing in FoFs can also help spread the risk of investing in private equity because such FoFs invest the capital in a variety of funds. A diversified multiple manager portfolio has the objective of lowering volatility of the total return while gaining exposure to multiple strategies. On the downside, fees on FoFs are typically higher than those on regular funds, because they include the fees charged by the underlying funds. FoFs distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. The FoF manager is paid a fee for choosing different strategies and managers, becoming the “defacto” consultant for funds. In FoFs, investors in funds of funds are willing to pay two sets of fees, one to the fund-of-funds manager and another set of (usually higher) fees to the managers of the underlying funds.
A hedge fund is a private, unregulated investment fund for large investments (minimum investments typically begin at US $1 million) specializing in high risk, short term speculation on bonds, currencies, stock options and derivatives. Hedge funds trade and invest in various assets such as securities, commodities, currency, and derivatives on behalf of their investors.
While some hedge funds may pursue conservative or market-neutral strategies, many others take highly leveraged bets on directions of currency or stock movements that are not offset by a corresponding hedged position, making them more speculative and risky undertakings. Hedge funds are allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives because hedge funds are exempt from many of the rules and regulations governing other mutual funds. Thus, hedge funds use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as commodities, emerging markets, private equity or distressed securities, and using return-enhancing tools such as leverage, derivatives, arbitrage and short selling.
Thus, what makes hedge funds somewhat unique is their diversity. The variety of hedge fund strategies exceeds that of a traditional mutual fund or stock broker. These strategies tend to be more niche-like in their approach and frequently, much less dependent upon the stock market for returns. Investors often prefer to invest in hedge funds because the fund managers have a direct interest in the positive performance of their funds. Hedge fund managers are compensated largely based upon how well they perform and in many cases the fund manager is also one of the key investors in the fund.
As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%) as a performance fee in addition to annual management charges and initial fees. The performance fee is paid to the fund manager and refers to a certain percentage that the hedge fund charges per year over and above the management fee. As with other funds, the performance fee usually is 20% over a threshold performance (hurdle rate, e.g., a benchmark rate such as Libor or the one-year Treasury bill rate plus a spread) if any, by which the increase in the Net Asset Value (NAV), adjusted to include distributions and cash flows, exceeds the notional increase in the NAV that would have been achieved otherwise via investment elsewhere.